🔐🏦 How A Hedge Fund Broke the Crypto Industry
Hey all, welcome back to another Sunday edition of Hump Days! Lots of crazy stuff has been happening in the crypto world recently so we decided to break it all down today. Before diving into that, here’s some other interesting things that happened this week…
Sequoia Capital raising two new funds worth up to $2.25 billion (TechCrunch)
Waymo’s worst automated truck crash ever (TechCrunch)
Snapchat officially introduces its paid subscription service (TechCrunch)
Amazon reportedly plans to hold a second Prime event in the fall (TechCrunch)
Crypto Insanity…
Crypto hedge fund, Three Arrows, files for Chapter 15 bankruptcy (Bloomberg)
Genesis faces ‘hundreds of millions’ in losses as Three Arrows exposure swamps crypto lenders (CoinDesk)
Crypto miners face margin calls, defaults (CoinDesk)
Lots of craziness has been happening in the crypto industry recently, and most of it ties back to the same hedge fund…
On June 16th, the Financial Times reported that Three Arrows Capital (3AC), a Singapore-based crypto hedge fund, failed to meet margin calls from lenders.
A margin call is when you borrow assets and those assets either decrease or increase too much in value, resulting in the lender forcing you to either sell the asset or deposit more funds to meet certain capital requirements.
According to its website, 3AC is a “hedge fund established in 2012 and focuses on providing superior risk-adjusted returns”.
3AC’s biggest holdings included Luna, Avalanche, Solana, and Axie Infinity. All of which are down ~90% and Luna is essentially at 0.
According to sources, 3AC had ties to almost all major crypto firms and it was said that “they worked with everybody”. 3AC would borrow crypto and cash from these firms in an attempt to leverage their crypto positions. Most notably, BlockFi (rip.), Voyager Digital, and Genesis all had lent large sums to 3AC. While leverage could multiply your gains, it also works the other way around. If everything crashes, you could end up owing more than your original investment. Evidently, 3AC borrowed too much, levering up their portfolio with highly risky bets.
On June 22nd, the WSJ reported that Voyager Digital (its stock is down >95% YTD) would issue a notice of default to 3AC if it didn’t make a full repayment of $666 million by June 27th. Voyager had reportedly lent 15,250 bitcoin and $350 million in USDC to 3AC…
On June 27th, 3AC received a notice of default. Later that day, a British Virgin Islands court ordered the liquidation of 3AC, after creditors sued the fund for failure to repay its debt.
The implosion of 3AC resulted in massive losses for many crypto giants. CoinDesk reported that Genesis was facing losses into the ‘hundreds of millions’, but they won’t know the final loss for a while. In the meantime, it’s pulling credit lines from various counter-parties left and right.
Unfortunately, the bad news for the crypto industry doesn’t end there. Over the past few weeks, Celsius, Babel Finance, and Voyager have all suspended withdrawals and transactions.
Liquidity has recently been a massive issue for these crypto platforms, and it seems like capitulation has arrived in the crypto markets.
Something that is absolutely astonishing is the massive risk and leverage that was taken on by these crypto companies, but downplayed by these companies’ executives.
For instance, Celsius used to pitch that it was less risky than a bank with better returns for customers. Meanwhile, WSJ found Celsius investor documents that showed it had little cushion in the event of a ‘bank run’. Celsius had an assets-to-equity ratio of 19-1, while the median assets-to-equity ratio for North American banks is about 9-1. What makes it even worse is that essentially all of its assets were investments in the highly volatile crypto sector…
On the upstream segment of the crypto industry, it doesn’t get any better. CoinDesk reported that private and public crypto miners owed between $2 billion to $4 billion in debt used to finance large mining facilities. With margin calls likely racking up, bitcoin miners sold over 100% of their monthly production, compared to 30% between January and April.
So what does this all mean for the future of crypto?
Bitcoin will survive, but probably at a lower price for a while (it’s been found that bitcoin has a high correlation to the growth in global money supply), and all the sh*tcoins will probably die off over time.
For all these crypto companies, there will likely be lots of consolidation to come. We’ve already seen BlockFi sign agreements with FTX for a $400-million revolving credit facility (think of this as a credit card limit) as well as the option to acquire BlockFi at a price of up to $240 million.
Simply put, the crypto economy grew too fast, fueled by quantitative easing, low rates, and record growth in the money supply. With a new era of quantitative tightening beginning, the future for risky assets will be cloudy.